Wanting It to Be Over Isn't Enough

VETERAN investors have learned the hard way that for a company in crisis, even the smallest moves by its executives can mean a lot. Shrewd investors also know to question Wall Street's quick pronouncements that the company's crisis, whatever it involved, has passed.

And yet, a primal urge remains among many investors to heed all spin that is positive. People who buy stocks are optimists, after all.

Shareholders of SFBC International, the nation's largest administrator of clinical trials for drug makers and medical device manufacturers, face just such a conundrum. The company, still recovering from deep and wide-ranging turmoil, has recently installed new management, and Wall Street analysts are recommending its shares, braying that the worst is over.

But a closer look indicates that the company's managers seem interested in silencing critics and avoiding the kind of sweeping changes to their operations that some investors would prefer.

You may not know SFBC, but the company has conducted trials for many of the world's leading pharmaceutical companies and generic drug makers. Bristol-Myers Squibb has been a major customer, and SFBC conducted studies for Merck on Vioxx, the arthritis painkiller, after it was approved by the Food and Drug Administration. Vioxx was withdrawn from the market in 2004.

SFBC's woes began last November, when Bloomberg News published an extensive report questioning its practices and its behavior toward drug trial participants -- some of them poor, non-English-speaking immigrants -- at its Miami facility, a former Holiday Inn. In December, a drug trial at the company's Montreal unit collapsed when one participant infected others with tuberculosis.

Senator Charles E. Grassley, an Iowa Republican and Finance Committee chairman, opened an investigation into SFBC, and the Securities and Exchange Commission came calling.

Not surprisingly, SFBC's shares plummeted on these unhappy events. It hired an independent law firm to investigate its operations, but it turned up just a few minor problems.

Things seemed to be stabilizing until a mid-December conference call with investors, when a hedge fund manager brought up some regulatory problems in the past of a top SFBC executive, Gerald L. Seifer. Only then did the company's board remove him and two SFBC founders.

Departing were Arnold Hantman, SFBC's chief executive; Lisa Krinsky, its president, a graduate of a Caribbean medical school who is not licensed to practice medicine in the United States; and Mr. Seifer, a vice president of legal affairs who is not a lawyer. Real estate records show that Ms. Krinsky and Mr. Seifer bought a $15 million home together in Hillsboro Beach, Fla., last year.

None of the former executives could be reached for comment.

In 1992, the Federal Trade Commission sued Mr. Seifer and a wireless cable company he owned; in 1994, the S.E.C. sued both him and another company he owned. The suits contended that Mr. Seifer misled investors and consumers; he settled the suits without admitting or denying wrongdoing.

Until the conference call, however, SFBC had not publicly disclosed Mr. Seifer's previous business history or his executive position at the company -- though some fine print in one filing called him a consultant.

Upon these executives' exits, the company installed as chief executive Jeffrey P. McMullen, a former executive at PharmaNet Inc., a provider of clinical development and consulting services to drug companies. SFBC acquired PharmaNet in late 2004.

SIX weeks into the job, Mr. McMullen seems to have persuaded investors that he is righting the ship. SFBC's shares have risen 50 percent since he took over. The latest push came on Feb. 2, when Mr. McMullen met with analysts and investors at SFBC's new headquarters in Princeton, N.J. The next day, Goldman Sachs Asset Management disclosed that it owned a 9.6 percent stake in the company.

Wall Street analysts at the meeting also liked what they saw, urging investors to buy SFBC shares. "Yesterday's meeting gave us greater comfort with SFBC's current and future operations," a Jefferies & Company analyst wrote. "We believe C.E.O. McMullen is addressing risk issues aggressively and that, contrary to some investors concerns, SFBC is winning new business as opposed to losing it."

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An analyst at UBS also recommended the shares, saying that "the right management team is now in place." Both investment firms helped SFBC sell 3.5 million shares to the public last March at $38 each.

But not all who attended Mr. McMullen's meeting came away bullish. Some investors said they were troubled that the company, whose work to regain investor trust is surely not complete, ejected a participant at the meeting after he asked questions relating to SFBC's profitability and cash position. Michael York, an SFBC spokesman, said the company would not provide any information for this column.

But it isn't as if the ejected investor, who was not identified on a Webcast of the meeting, asked irrelevant questions. In late January, analysts at Moody's Investors Service said that the company might not be able to generate enough cash flow this year to cover working capital and capital expenditures. Moody's also said it expects to see a drop in SFBC's earnings before interest, taxes, depreciation and amortization. As a result, the rating agency said, SFBC may have trouble complying with financial covenants in its bank loan.

While investors have been quick to buy Mr. McMullen's act, SFBC's customers may be another matter. Mr. McMullen said at the Feb. 2 meeting that SFBC's clients did not seem to be abandoning it.

For example, a spokeswoman for Merck, Casey Stavropoulos, said that it had reviewed SFBC's conduct. "Based on this review," she said, "we believe in the scientific integrity of the research SFBC has conducted for us, and at this time we intend to continue to engage them in research."

But two former customers say they are indeed going elsewhere for their clinical trial work. Tony Plohoros, a spokesman at Bristol-Myers Squibb, said in a statement: "Bristol-Myers Squibb is not currently working with SFBC on any active clinical trials and has no plans to place further studies with that company at this time. Presently, we are in the process of conducting a thorough review of all the work SFBC has done for Bristol-Myers Squibb."

Robert T. Foster executive chairman at Isotechnika Inc., the company in Edmonton, Alberta, whose drug trial by SFBC collapsed after tuberculosis broke out, said he would not hire the company again. "We'll definitely be looking beyond SFBC for supplying our contract research help in the future," he said. "I am not a lawyer, but SFBC should be liable for anything that comes out of this. They didn't recruit as carefully as they should have."

One problem may be that Mr. McMullen has not hired an outside firm to plumb SFBC's operations thoroughly. While the company is conducting a full-scale review of its business and practices, the inquiry is being handled internally.

Finally, there are questions about how clean a sweep Mr. McMullen has made. High-level executives who worked closely with Mr. Hantman, Ms. Krinsky and Mr. Seifer remain at the company. And it is still represented by Michael D. Harris, an outside counsel in West Palm Beach, Fla. Mr. Harris represented Mr. Seifer on many of his previous ventures, including those that drew scrutiny from regulators. Mr. Harris's office referred questions to Mr. York, the SFBC spokesman who declined to comment.

SENATOR GRASSLEY, meanwhile, is still on the case. Last week, he sent a letter to Mr. McMullen asking for details of SFBC's standard operating procedures and personnel qualifications.

"This company has shooed out some of the top birds, but we don't know yet how much of a mess is left in the coop," Mr. Grassley said on Friday. "When you're looking at the integrity of clinical research, it's important to know whether corners were cut. Were patients protected and rights respected? Were study investigators appropriately credentialed? We're seeking answers to these questions."

Company officials have until Feb. 27 to respond. Inquiring investors will surely want to know what they say.

Correction: February 19, 2006, Sunday The Gretchen Morgenson column last Sunday, about SFBC International, a company that conducts clinical trials for drug makers, misstated its ranking in its field. It is among the largest companies, not the largest.